The Sarbanes-Oxley Act and Market Efficiency: A Case of 10-K Filings

• In Event: Research in Financial Accounting I

Abstract

We study if security markets became more efficient following 10-K filings after the passage of the Sarbanes-Oxley Act of 2002 (SOX). We find that the market reaction to 10-K filings significantly diminishes after SOX as stock volatility, volumes, and bid-ask spread averages quickly decline. We also find that future earnings are less sensitive to filing day returns. Further, the continuation of the filing day returns over the next one year nearly vanishes with the passage of SOX. Further examination shows that the continuation of filing day returns is mostly evident in quarter-end filings. We also find that while the firm-level opacity and 10-K’s complexity mattered more during the pre-SOX period, their impact is not as evident during the post-SOX period. The pre-filing returns over six months before filing are negatively correlated with the filing day returns indicating an adverse filing surprise in the pre-SOX period. However, in the post-SOX period, the surprise is in the same direction as the pre-filing returns. Overall, our results provide evidence that SOX succeeded in improving information disclosure and improved market efficiency around 10-K filings.

Authors

• Shrikant Jategaonkar, Southern Illinois University Edwardsville

• Rakesh Bharati, Southern Illinois University Edwardsville

• Susan Crain, Missouri State University